The Persistence of Current Account Balances and its Determinants : The Implications for Global Rebalancing
AbstractThis paper examines the statistical nature of the persistency of current account balances and its determinants. With the assumption that stationary current account series ensures the long-run budget constraint while countries may experience â€œlocal non-stationarityâ€ in current account balances, we examine the dynamics of current account balances across a panel of 70 countries. We find that once we allow current account series to take regime shifts by applying a Markovswitching (MS) process, we are able not only to reject the unit root null hypothesis for a much increased number of countries than with standard linear unit root tests, but also to identify notable cross-country differences in the timing and duration of stationary and locally nonstationary regimes. Armed with the structural break dates the MS-ADF testing provides, we investigate the determinants of the different degrees of current account persistence. We find that emerging market countries with fixed exchange rate regime or countries with greater financial openness are more likely to enter a random walk regime, which is more evident among countries with current account deficits. For countries with all levels of income, trade openness decreases the likelihood of entering the random walk regime, presumably reducing the cost of current account adjustments. Also, countries with budget deficits tend to stay in stationary regimes, so do those with current account deficits, implying that markets force these countries to rebalance their current account imbalances. When we examine the determinants of various degrees of current account persistence, the type of exchange rate regimes no longer affects the extent of current account persistence. However, countries with greater trade or financial openness, or those with mounting pressure from real exchange rate misalignment tend to have a smaller degree of current account persistence while international reserves holding seems to contribute to a larger degree of persistence.
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Bibliographic InfoPaper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 23381.
Date of creation: Dec 2012
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Current Account Balances; Global rebalancing; financial openness; real exchange rate misalignment;
Other versions of this item:
- Clower, Erica & Ito, Hiro, 2012. "The Persistence of Current Account Balances and its Determinants: The Implications for Global Rebalancing," ADBI Working Papers, Asian Development Bank Institute 400, Asian Development Bank Institute.
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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- Charles Nelson & Eric Zivot & Jeremy M. Piger, 2001.
"Markov regime switching and unit root tests,"
Working Papers, Federal Reserve Bank of St. Louis
2001-013, Federal Reserve Bank of St. Louis.
- Nelson, Charles R & Piger, Jeremy & Zivot, Eric, 2001. "Markov Regime Switching and Unit-Root Tests," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 19(4), pages 404-15, October.
- Charles R. Nelson & Jeremy Piger & Eric Zivot, 2000. "Markov regime-switching and unit root tests," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 683, Board of Governors of the Federal Reserve System (U.S.).
- Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1999. "Detecting Periodically Collapsing Bubbles: A Markov-Switching Unit Root Test," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(2), pages 143-54, March-Apr.
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